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Washington businesses hope to kill Inslee's carbon cap

Can a state environmental-protection regulation be considered a "tax"?

That’s a central question in a lawsuit by business interests against Washington’s regulatory cap on carbon-pollution emissions that went into effect on Jan. 1.

The answer could determine whether Gov. Jay Inslee can make progress on reducing global warming emissions in the state, long one of his top priorities.

Inslee, who took on the issue in Congress before winning election as governor in 2012, wants to make the Northwest a leader in combating climate change. And he’s tried almost since taking office to win a cap or a tax on carbon emissions. For three years, Inslee and his allies unsuccessfully tried get carbon cap-and-trade bills through the Republican-dominated Senate, which always blocked them. In 2015, Inslee decided to use his executive powers to enforce a 2008 state law saying that polluting industries must gradually trim their carbon emissions. Even after doing so, he has also continued to advocate for the Legislature to enact a carbon tax.

The state's cap will gradually shrink the amount of carbon that can be emitted while gradually increasing the number of affected businesses and organizations, eventually ranging from fertilizer plants to the University of Washington. By 2035, overall emissions must be cut to 25 percent below Washington’s 1990 levels; ultimately, in 2050, the emissions would be cut to half of the 1990 levels.

The plaintiffs in the suit include the Association of Washington Business, the Western States Petroleum Association, the Industrial Customers of Northwest Utilities, the Washington Farm Bureau, the Northwest Pulp & Paper Association, and the Northwest Food Processors Association and others.

In their suit, the business groups say that, even without a requirement to make payments to the state, they are, in fact, being taxed. “Forcing regulated entities to do things that cost money to achieve public benefits can constitute ‘a tax in kind,’” they say in their suit.

The plaintiffs argue that since the state constitution allows only the Legislature to impose new taxes, it would be illegal for Ecology to require a company to pay money to comply with an agency regulation — because those expenses should be considered a tax.

The Washington Department of Ecology “cannot shift the social costs of desired public benefits onto a subset of a population under the guise of a regulation. This cost-shifting is a tax, and absent specific legislative pronouncement, the tax is impermissible and invalid,” the business groups argue. The plaintiffs in the lawsuit, filed in Thurston County Superior Court, also contend that Ecology does not have the authority in general to create the disputed regulations.

In court documents, the Ecology Department disputed the plaintiff’s arguments as incorrect and not supported by state law. However, Ecology, the Attorney General’s office, the Association of Washington Business and the Western States Petroleum Association all declined to discuss the lawsuit and its arguments, citing the fact that the litigation is still ongoing.

Whoever loses in Superior Court will likely appeal that ruling, probably all the way up to the Washington Supreme Court at some point.

Hugh Spitzer, law professor at the University of Washington regarded as an expert on the state constitution, said he couldn’t make an informed analysis of the suit’s premises, because he is not familiar with the “tax-in-kind” argument and applicable state laws. However, he wrote in an email that, in general, the regulation “doesn’t look like a tax, as we understand the term in Washington State.”

Todd Myers, analyst for the Washington Policy Center in Seattle, said he sees merit in the challenge to the regulation. A cap-and-trade program — with its compliance costs — is essentially the same as a carbon tax, he said. “With not very many tweaks, you can turn cap-and-trade into a tax,” he said.

Myers also said that a complicated program, like cap and trade, can lead to case-by-case exceptions and changes, which further complicates the operation of the program. "The solution should be simple and transparent," he said.

Kristin Eberhard, carbon pricing researcher at the Seattle-based Sightline Institute, said polluting facilities have some different options on how to comply with the new state carbon regulations.

Although California has different cap-and-trade rules than Washington, she noted that industries there challenged California regulations in court on the same "tax-in-kind argument, and have so far lost. The Los Angeles Times recently reported the state court of appeals upheld California cap-and-trade system by a 2-1 vote on the taxing issue.

Most scientists accept that carbon emissions contribute to global warming, which has ecological ripple effects. The controversy is largely over whether forcing smokestack industries to significantly trim emissions will chase lots of jobs and business profits from Washington. The affected industries argue this will happen.

Capping carbon emissions’ effects on jobs has not been strongly studied, but the few available government observations in California and Quebec, two parts of North America with relatively longstanding programs, indicate that their cap-and-trade programs has not significantly affected the employment picture.

The state’s ecology department identified 35-40 facilities that generate more than 100,000 metric tons of carbon emissions annually. At least 20 of these sites started participating in the program on Jan. 1, 2017.

Meanwhile, another 15 to 18 “energy-intensive-trade-exposed” facilities have been identified. These include aluminum plants and others. Sites on this list would be phased in by 2020 because the state has identified major energy needs that translate to extra carbon emissions. Ecology said these facilities face disadvantages with out-of-state competitors that don’t have emission caps. The idea is to give these facilities an extra three years to find cost-effective ways to comply.

Because of the state’s concerns about potential competitive disadvantages, several other sites will be allowed to wait beyond 2020 before they will have to begin complying. These include Boeing being allowed to delay until 2035.

If a facility cannot get beneath the state’s emissions cap by physical and engineering changes, it will be able to buy allowances from other plants that are beneath their emissions limits in Washington or from entering into a cap-and-trade arrangement already shared among California, Quebec and Ontario, which also started its program on Jan. 1.